July 24, 2007

While we're on the issue of bankruptcy, and the ramifications of the 2005 legislation, here's an interesting way to neuter its negative impact: slash the budget for the entity that's supposed to determine whether a bankruptcy was filed in good faith.

Perhaps the most controversial aspect of the 2005 Bankruptcy Reform Act (BARF) was a provision that created a presumption that debtors who made over the medium income for a state were filing the case in bad faith if they chose Chapter 7 relief. That presumption could be overcome if the debtor were to show that after taking his monthly expenses into account, he would not have sufficient funds to repay at least ten percent of his unsecured debts over a five year period under a Chapter 13 plan. In reality, the presumption is almost always overcome, in large part because debtors who make just over the medium can show that their reasonable monthly expenses easily exceed their gross income, while many of those who make well over the medium have always filed under Chapters 11 or 13.

But it is, nonetheless, a hassle for debtors, who are charged a higher amount by their attorneys (such as me) for the burden of dealing with the U.S. Trustee's office, which has the mandate under the new law to raise the presumption whenever appropriate. That includes analyzing and preparing the schedules filed with the court, demanding further supporting documentation (in many cases, that entails credit card receipts going back a year), and filing motions to dismiss with the court.

This past week, the House Judiciary Committee sent a shot through the bows of the credit industry by slashing the funds available for the UST to enforce the act, stating

The Committee is concerned that excessive resources are being expended on efforts by the United States Trustee Program to dismiss cases for insignificant filing defects (thereby creating added burdens on the court and debtors associated with refilings); on the unnecessary use of U.S. Trustee personnel to participate in creditors' meetings that are already handled and conducted by private trustees; and on making burdensome requests of debtors to provide documentation that has no material effect on the outcome of bankruptcy cases. Such actions by the U.S. Trustee Program are making the bankruptcy process more costly and therefore less available for those who need it. The Committee directs the U.S. Trustees to immediately examine these problems and report back two months after enactment of this Act on efforts to remedy them as soon as possible.

Without funding, the Trustee will have to drastically reduce its investigation of debtors who are above the statewide median, making the controversial provision in the new law a practical nullity. Although I expect much of the funds to be restored, thanks in no small part to a certain powerful Senate Democrat (Biden, D-Visa), this is the first step towards overturning the noxious law. There is most definitely a new sheriff in town.